How do I get a Lease in Nigeria?

As a result of the problems associated with establishing companies with huge asset requirements, coupled with the substantial capital often tied up in providing infrastructural needs like electricity, water, roads and communications, many prudent organizations have taken a lease in Nigeria provided by banks and finance companies. This approach tends to reduce the strain on the initial funding.

Leasing in Nigeria has become popular in recent times due largely to the impact of industrialization and proliferation of manufacturing concerns and the Importance of leasing has always been emphasized in the CBN annual credit guidelines regarding the maximum percentage of the merchant banks total asset that shall be in equipment leasing.

What is a Lease?

Leasing can be described as a means of acquiring fixed assets which a person{including corporate body} is unable to buy outright because of the capital intensive nature of such assets. A lease is a contract outlining the terms under which one party agrees to rent property owned by another party. It guarantees the lessee, also known as the tenant, use of an asset and guarantees the lessor, the property owner or landlord, regular payments from the lessee for a specified number of months or years.

Leases are contracts whereby one party (the lessee) hires equipment or services from another party (the lessor) in a way that the lessee acquires the use of the asset without purchasing it. Leasing can also be defined further as an arrangement between two parties{lessor and lessee} in other words, it is” an agreement whereby the lessor conveys to the lessee, in return for rent, the right to use an asset for an agreed period of time.

Categories of leases

Accounting

Financial leases in which the lessee agrees to make a series of payments for the use of equipment under a contract which cannot be cancelled by either side during the operating life of the equipment.
Operating leases, in which the contract is for a period shorter than the operating life of the asset and either party may cancel the contract on suitable notice.

Trade As relates to international trade, the foreign buyer arranges to lease the asset from a leasing company which pays the exporter immediately after its delivery and installation. Sometimes,” leveraged” or “geared” leases can be arranged whereby the lessor provides only part of the capital requirement of the asset and raises the balance on the money market. There are two ways by which leasing can be arranged by an oversea buyer; the local leasing and the cross- border leasing is more suitable for major transactions of higher value, local/finance leasing is more suited for lover/value items.

local leasing: this is an arrangement whereby the overseas user is in contact with a local leasing company in the supplier’s country through an international credit club or union. the leasing company pays the exporter in full and obtains repayment from the importer by regular payments. There will be no recourse to the exporter in the event of default by the importer. Local leasing is also referred to as “finance lease” in that it transfers substantially all the risks and reward incident to owernership from the lessor to the lesse. The lesse becomes responsible for any repairs and maintenance of the asset involved and the lease will normally cover most of the useful life of the asset. Finance lease secures for the lessor the recovery of its capital outlay from a single transaction plus a return on such funds he has invested in acquiring the asset he is leasing.

Local/finance leasing has some special advantages over cross-boarder leasing. These include the following:

local leasing can be arranged for the delivered cost of the equipment rather than the exporter’s selling price
the term of the lease is usually longer than it is for a cross-boarder lease thus enabling the spreading of the amount payable for the usage of the asset.
The lessee is not exposed to any exchange risks since repayment under the lease is usually made in his local currency. However, it must be noted that the local leasing company would have incorporated an element of this risks into rent payable, but notwithstanding, this is still favorable. The devil one knows is better than the unknown angel
Local leasing cannot be revoked or cancelled

Cross-boarder leasing: this is a direct leasing between the leasing company and the overseas buyer. The leasing company makes repayment arrangement with the overseas buyer on the transaction and pays the exporter cash for the asset involved.

Termination:

Occurrence of any event expressly specified in the leasing agreement
Any act of frustration e.g. accidental loss or damage to the subject matter of the lease
On expiration of the lease agreement
Acceptance of one party of a repudiation of the lease agreement as proposed by the other party to such agreement

Advantages of a lease in Nigeria

The advantage of leasing lie largely in the special tax position of the lessor an /or lessee. A lessee with losses and or capital allowances brought forward which exceed taxable profits will obtain no immediate relief for capital expenditure on purchasing an asset. A lessor may be expected to take account of tax reliefs which will in all probability be immediately available to him in fixing the rentals.

It is an alternative source of making use of an asset for which a company is unable to raise funds to purchase and yet acquiring it for immediate use
Thus, fund is indirectly obtained without contravention of statutory borrowing powers of the company
It follows from the above that it eliminates high gearing effects on companies which are normally associated with loans
The lessor may be able to gain tax advantage such as capital allowances on the leased asset and value added tax paid by the lessor when purchasing the asset and pass some of these tax benefits to the lesse in form of a lower financing cost.
Leasing involves no capital outlay
Since rentals payable are fixed under leasing, it provides an aid to future budget plans and forecasts
A lessee may not wish to own assets which are likely to become unimportant to his business after a short period of time. Leasing provides him with a means of the avoidance
Leasing could be a hedge against inflation
Ability of the company to obtain new assets in this way enhances its corporate image

Disadvantages of a lease in Nigeria

Leasing, as a form of non-bank finance, is not ideal for all companies. Students, bankers and financial advisers alike should bear this in mind while recommending leasing to a customer. All other things being equal, the following categories of company are considered good for leasing:

Companies already having plenty of fixed assets which at that point in time needs replacement;
Companies having cash flow problems
Companies whose major raw materials and other inputs are subjects to VAT[value added tax] or sales tax
Companies having substantial losses to carry forward and as a result not placed in a position to take full advantage of capital allowances

On the other hand, the following categories of companies are not good for leasing and as such should not be advised to use leasing as a method of finance:

Companies which are newly formed and incorporated
Companies with very few fixed assets
Companies whose major raw materials and other inputs are not subject to VAT or sales tax;